Monday, December 26, 2016

GMROI4U (Tradecraft)

It's my day off, what should I work on.... Hmmm....

Oh yeah, that post I wanted to write on GMROI. I've never done Gross Margin Return on Investment, but someone on Facebook asked me how to fine tune their inventory beyond turn rates, and a more business savvy store owner stepped in with this helpful calculation. It made me want to investigate further.

GMROI means gross margin return on investment. I think inventory turns are good enough for calculating efficiency, if your margins are relatively stable across categories. My average gross margin is close to 45% in nearly every department, so it never occurred to me to want to know more than turns. In fact, when I calculated my GMROI for the first time (a few moments ago), it basically tracked with my turn rates. It can still inform decisions, even in my case, as we'll learn below.

Where GMROI becomes especially helpful is if you're selling a lot of product with a wider variety of margins. If you sell a lot of used games (high margins), Magic singles (could be high, could be low), or you sell a lot of CCGs at a high discount (low margin), GMROI might be an eye opener. It's a measure of inventory productivity, and if you have a choice, you may decide to shift inventory dollars to more productive areas. A lot of store owners, especially Magic shops, have no choice. But you're reading about GMROI, so you're smarter than them.

Using the linked GMROI article from the Retail Owners Institute, which you should read after this post, here is the GMROI formula:

This number tells you the amount of dollars you're grossing on every dollar you invest in that category. Your gross margin return on investment. Can I learn anything from GMROI? Even though my turns and my GMROI track closely, lets look at some of my troublesome departments and see if I can draw any new conclusions:

Toys is a troublesome little department, with most of it on perpetual clearance. It has a high turn rate, but I know not to trust that. However, the GMROI is respectable. For every dollar I invested in this troublesome category, I grossed $2.50. Rather than dump toys, I probably want to continue with them, struggling to dial in the right mix, as long as it's not too time consuming (the sales are hardly worth the effort). Since we sold down most toys in December, perhaps I might consider them seasonal. I wouldn't have considered this without GMROI.

A different example of where GMROI is informative in the other direction is Classic Games. It has a turn rate of around 2, which is not good, but not normally bad enough to dump them (it was as low as one turn in past years). However, my GMROI is .9, meaning for every $1 I invested in classic games, I grossed $.90 back. That's terrible. It's a high opportunity cost and a waste of money. It might be time to drop Classic Games entirely. Although there are soft calculations too, such as seeing them as a merchandising expense (yuck).

Since Classic Games don't have a particularly unusual margin, this gives me a more solid cost to my abstract turn rate. Two or less turns is wasting money, rather than just being low. So if I have $50 to spend on chess sets or $50 to spend on some Funko vinyl figures, an area that has been nothing but trouble (I thought), I'll gross $125 on the Funko versus $45 on a chess set (losing $5). Of course, I should really just put that $50 into Magic, if at all possible, since CCGs (not shown) has an 11 GMROI ($550 gross).

So GMROI is easy enough to calculate, especially if you're already laying out calculations for turn rates. Give it a shot and see if you learn anything. It might be even more useful at the game category level or individual game level.